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Key issues considered by CESR are:

·         The liability of the depositary where there is delegation of the custody function

·         The extent of the depositary liability.

This follows on from Madoff and the key issue arising of whether the Depositary has strict liability for safekeeping of the assets of the scheme where sub-custody is delegated. As we have previously reported (click here) , in 2009 the Paris Appeals court has recently held that strict liability does apply- a position broadly disputed by Depositories across Europe.

The CESR Report, compiled based on feedback from the national regulators, indicates that there is strict liability (“Obligation of Result”) in the following countries - France, Greece, Hungary, Latvia, Lithuania, Portugal, Romania and Sweden, albeit with the caveat throughout that this has not been tested in the Courts.

For the UK, the CESR document notes that for the FSA “the obligation is not one of result, since it foresees the possibility that not all losses will be as a result of a depository’s unjustifiable failure or improper performance of its duties, in which case it might not be held liable for the loss”.

This is of obvious importance to Depositaries. Depositaries in UK, Dublin and Luxembourg generally dispute the existence of strict liability and any move to impose strict liability may therefore lead to an increasing of custody fees or to some of those players (those without their own global sub-custody network) exiting the market. It is also key issue from an investor protection perspective as ultimately it addresses the issue of the security of the assets in the event of a custody failure or of Madoff type incidents.

 Note: CESR distinguishes between countries according to whether there is an “obligation of means” or an “obligation of result. ” Obligation of means should be understood as an obligation on the depositary to devote appropriate resources and carry out appropriate due diligence so as to ensure safe-keeping of assets. “Obligation of result” should be understood as an obligation on the depositary to safe-keep assets and to restitute them in the case of loss – essentially strict liability.

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